Risk aversion returned with a vengeance in the third quarter as the dire lack of political leadership in the US and Europe spilled over into capital markets. Given the tough economic climate and the lack of clarity about future economic growth, market participants took a dim view of political players on both sides of the Atlantic's inability to move away from party politics and grasp the challenge of dealing with long-term fiscal challenges ahead. In this uncertain environment the market has become even more myopic with short-term newsflow, resulting in massive intraday market volatility. Volatility has spiked and the perceived safe haven of US treasuries were the only asset class to deliver a positive return despite US debt being downgraded by one of the global ratings agencies. In this challenging environment the fund declined by 1.7% for the quarter versus the benchmark decline of 2% and -5.8% delivered by the equity market. As the market declined during the quarter, we actively increased the fund's equity position. We started the quarter fairly defensively positioned with just over 60% in equities, which consisted of big weightings in more defensive businesses. At quarter-end the fund is now 70% invested in equities and we have moved the exposure from some of the defensive names, which have held up well, into more cyclical stocks which have come under a lot of pressure and as a result are offering a lot of value.

The big increase in weighting has been in commodities. The fund invested significantly into the large diversified miners, predominantly Anglo American and BHP Billiton, but also added to the smaller African Rainbow Minerals as well. We exited successfully from our position in Optimum Coal as the company became the focus of a number of potential bidders interested in its attractive coal assets. While we still believe commodity prices are trading above their long-term normal levels, it is our view that this has been more than priced into the equity valuations which makes them stand out as compelling investments. Across the rest of the portfolio, we have further reduced the fund's exposure to retailers as we find very little value in this sector. Instead, we added selectively to a number of different industrial names as and when better valuation opportunities have emerged. We have added to our MTN position in particular as the Rand weakened. MTN, with its diversified earnings stream, stands to benefit from the recent spate of currency weakness. In the financial space we have been pleased with the generally good results delivered by our bank holdings and continue to be comfortable with our positions in this much unloved sector given our view that it offers great value and good prospects for dividends. The fund has been fairly fully invested in respect to its offshore weighting for some time. This has helped the fund during the period, even though some of the underlying equity and bond exposures also suffered during the sell-off. We continue to hold a full offshore weighting, though we have successfully traded our position during the rand volatility. We continue to find some intriguing dollar and euro investments particularly in the fixed interest space which will add a lot of value over time. The majority of our fixed interest exposure continues to be through inflationlinked bonds, which given the spike in inflation and apparent lack of concern by the MPC to try and contain this through higher interest rates, still appears to be the best way to maximise real returns for investors. Looking forward investors should steel themselves for further volatility. There is still great uncertainty in the world and the economic recovery will remain patchy. However, this volatility continues to offer the long-term investor great opportunities to buy mispriced assets which should enable the fund to continue to deliver on its long-term track record.

Portfolio manager
Neville Chester

This is an auspicious quarter for the Coronation Market Plus Fund as it marks its ten-year anniversary since being launched on 2 July 2001. At the time of launching the fund, Coronation took the decision to focus on a range of risk-profiled asset allocation funds that would allow the company to utilise its skills across all asset classes in order to generate appropriate risk-adjusted returns for clients of differing risk profiles. This has allowed our clients to choose a fund that matches their risk appetite from a simple range of products, and has allowed us to generate market-beating returns through our ability to change asset allocation based on where long-term value was most attractive.

As an actively managed fund that is not subject to the constraints of Regulation 28, Market Plus is positioned towards the upper end of the risk spectrum. This enables the fund to take very strong positions around high conviction views, which should in the longer term result in it outperforming the typical Regulation 28 pension fund. In fact, the flexible asset allocation philosophy has allowed the fund to outperform the equity market as well despite not being fully invested over this period.

Since inception net of all fees the fund has delivered a return of 19.0% p.a. compared against the balanced fund benchmark return of 17.1% p.a. and the JSE All Share return of 16.5% p.a. This is a phenomenal result for those that have supported the fund. For the last quarter, the fund delivered a result of 1.8% compared against the benchmark returns of 1.3% and -0.6% respectively.

The last quarter has seen a dramatic increase in nervousness from the global investor, with equity markets around the world coming under pressure. Global macro data has looked decidedly weaker than forecast. In addition, the unresolved debt problems in Greece and now the US (which needs a special motion passed to raise its government debt levels), has resulted in a much greater level of conservatism in asset allocation and outflows from the equity markets. The commodity market in particular has come under pressure and commodity producer equities even more so. As a result we have found more value in the resources sector on the JSE and have been adding to our Anglo American weighting as well as building up a position in BHP Billiton. During the quarter we were made an offer for our stake in Metorex, a copper producer in the DRC, and we expect this deal to be concluded in the third quarter. Despite commodity prices trading well above what we believe their normal levels are, the valuations of the producers in our view more than discount this in their share prices. At the peak of the previous commodity cycle, Anglo American traded as high as R556 a share against its current share price of R317.

The fund has also started increasing its overall equity weighting after being quite underweight in this past quarter. This view had been predominantly driven by our estimation that local equities were fully valued. Given the pullback in markets mentioned above, we do believe a slightly higher equity allocation is merited.

We remain quite heavily invested offshore, predominantly in equities, although we have had the opportunity to increase our bond weighting by investing in some high yield dollar and euro denominated bonds issued by South African corporates. We participated in a capital raising by Capital & Counties, the UK and SA listed property developer based in London, which has been extremely successful especially with its development of the Covent Garden precinct. In the local fixed interest space the fund continues to hold very little in the way of nominal bonds and is exposed predominantly to inflation linkers and floating rate notes. This holding is driven by our view on rising inflation and ultimately higher local interest rates.

The past ten years have been a fascinating and exciting period to be in the investment markets. SA has experienced two recessions and one enormous boom period, while the globe has gone from the tail-end of one of the greatest bull markets into the deepest recession since the thirties. Throughout all of this, through careful asset allocation and excellent stock selection the fund has delivered sterling results. We hope to be able to continue to meet this benchmark in the years ahead.

Portfolio manager
Neville Chester

The first quarter of 2011 was a volatile period, marked by gyrating equity markets as major political change in the Middle East and some major natural disasters impacted on investors' appetite for risk. Despite this backdrop, the fund performed well and generated a return of 1.6% against its benchmark return of 1.0%, and also beating the FTSE/JSE All Share Index return of 1.1%.

The market-beating returns were generated by a number of factors. Firstly, we had very low exposure to nominal bonds which underperformed on the back of a very poor Budget, which showed much greater debt issuance in the coming years to fund a larger-than-expected deficit. Secondly, our domestic stock selection delivered a good result and outperformed the benchmark. Finally, a big portion of our equity weighting was exposed to international equity which performed better than domestic equity during the period.

Our increased weighting to resources significantly contributed to the equity performance as we saw a general re-rating in this sector due to higher commodity prices and great cash flows announced in their full-year results for 2010. As a result, we have started looking to reduce this exposure slightly. We have not moved as dramatically as we did in 2008 as we do still see some selective value in this sector, but the opportunity is not as obvious as before.

Our industrial stock selection remains biased towards businesses with exposure to growth outside of SA as we remain concerned about the combination of low local growth and high domestic stock valuations. Instead, we are invested in businesses like MTN, SABMiller and Naspers which offer high quality exposure to other fast growing markets at a reasonable price.

As alluded to in previous commentaries, we are still overweight the banking sector. Our investment thesis here has been proven in the recent round of results which showed a significant declining trend in bad debts which more than offset the slowing top line. We expect this to continue into 2012, with good earnings growth and more importantly good dividends forecast for the future.

Our fixed interest exposure remains focused on floating rate notes and inflation-linked bonds as we are still very concerned about rising inflation risks in SA and what that will do to future interest rate levels. Through select credit exposures we manage to earn higher yields than other cash alternatives. Even though government nominal bonds have sold off we do not yet deem them to be attractive investments.

We have started adding to some high yield offshore bonds where we believe we know and understand the credit risk well and can earn above average returns. This has boosted the return on our non-equity offshore holdings. Outside of this we remain fairly heavily invested globally in equities where we still see better value than in the domestic market.

Portfolio manager
Neville Chester

Equity markets went out on a high in the final quarter of 2010 as market participants generally took a more benign view on the overall economic outlook. The counter to this 'risk on' trade was that the big developed market currencies continued to weaken, resulting in further strength in all the commodity-producing currencies such as the rand. The fund returned 5.2% for the quarter to end the calendar year with a total return of 16.8% against the 15.9% delivered by its balanced fund benchmark.

It was a very good year for stock selection within the fund's equity component and this again worked well in the final quarter of 2010. A number of our big positions performed well during this period including Anglo American (+21%), Impala (+29%), Sasol (+13%) and Naspers(+14%). The investment case for Anglo American in particular has come through nicely as the market started to appreciate that its expansion projects in South America will add significant value to shareholders. Once again, taking a long-term view on the valuation has proved its worth. You will notice that the major outperformers were mainly commodity shares, despite the rand strengthening over this period. Commodity prices have continued to soar globally as the US, and to a lesser extent Europe, keep pumping cash into the global economy. While these prices are way above normal, resource companies generate cash which can be returned to shareholders every year that they remain this high. We increased our weightings to resources early in the year when the market was less optimistic about the global recovery. Now that they have run quite hard we are looking at reducing some of our exposure even though we are cognisant that the rand is very strong and likely to weaken in the medium term.

An important change regarding the country's exchange controls occurred during the final quarter of the year. Exchange control was further relaxed, with pension funds now being able to externalise up to 25% of their assets, and unit trust management companies up to 30%. Given the investment opportunities presented globally and the relatively expensive SA equity market we have moved more funds offshore to take advantage of some of the better return opportunities.

Within the fixed interest space the fund is positioned for what we believe will be an uptick in inflation, followed by interest rates. The majority of our bonds are either inflation linked or floating rate notes, predominantly corporate paper which gives an additional yield over government bonds or bank call rates. We have also sold down our domestic property exposure as the yields in this sector are generally no longer that attractive. We have increased our weighting in UK property through Capital Shopping Centres following their capital raising to fund the purchase of a large property. Subsequently this share has become the subject of corporate activity, justifying our view that it is a unique asset with word-class centres.

As the equity markets ran, we have purchased some protection (equity market put options) which reduces overall equity exposure and potentially protects capital should there be a sharp sell-off. Given the great returns the fund has experienced we believe this to be prudent given the lower upside left in the SA market. The fund remains well diversified across asset classes and regions and is well positioned to continue generating long-term, inflation-beating returns.

Portfolio manager Neville Chester